American Superconductor Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2014. The company supplies wind-turbine and power-grid products, engineering, and related services. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $12.5 million, down 48% from $24.2 million | $24.2 million, down 49% from $47.3 million |
| Gross margin | (10.6%), versus 6.5% | (7.1%), versus 14.1% |
| Operating loss | $26.4 million, versus $11.0 million | $39.1 million, versus $19.9 million |
| Net loss | $25.4 million, or $0.31 per share, versus $14.6 million, or $0.24 per share | $38.9 million, or $0.49 per share, versus $25.1 million, or $0.42 per share |
| Operating cash flow | Cash used of $11.4 million for the six months, compared with $14.8 million in the prior-year period |
- Revenue declined in both segments: Wind revenue was $7.5 million for the quarter and $15.1 million for six months; Grid revenue was $5.0 million and $9.0 million, respectively. Management cited lower China customer revenue in Wind and lower D-VAR and Korea-related revenue in Grid.
- Negative gross margins reflected lower fixed-cost absorption as revenue fell, as well as prior-year revenue with 100% margins. Six-month SG&A fell to $16.0 million from $19.5 million, while reported R&D expense was broadly steady.
- Cash and cash equivalents were $34.7 million at September 30, down from $43.1 million at March 31. Including restricted cash, the total was $38.2 million, versus $49.4 million. Cash used in investing was $2.3 million; financing provided $0.8 million, including ATM equity proceeds and partly offset by debt repayments.
- Current assets were $82.5 million and current liabilities $66.1 million. The company reported $9.3 million of term-loan carrying value, net of discounts ($4.8 million current and $4.5 million long-term). The secured loans bear interest at 11% plus any prime-rate amount above 3.75%.
- Accumulated deficit was $895.3 million. The company reported recurring operating losses and negative operating cash flows.
Material changes and unusual items
- Revenue fell 48% year over year in the quarter and 49% for the half-year. Both segments recorded larger operating losses.
- An August 29 arbitration ruling ordered the company to pay Ghodawat approximately €8.3 million (about $10.6 million), plus 5.33% interest from the award date. The company recorded a $10.2 million charge; the award remained unpaid as of the filing. Management said it was exploring options and intended to defend against enforcement.
- The company fully impaired its Blade Dynamics investment, recording a $3.5 million charge in the quarter after concluding it was no longer recoverable. It was also seeking to sell its Tres Amigas investment, carried at $1.4 million.
- During the quarter, the company sold approximately 2.1 million shares through its at-the-market program at an average price of about $1.75 per share, receiving net proceeds of $3.7 million. Approximately $17.1 million of program capacity remained at September 30.
- Prior-year interest expense was higher partly because of non-cash charges on a convertible note, which was extinguished in March 2014. Six-month net interest expense was $1.0 million, versus $5.6 million.
Outlook, liquidity, and risks
The filing provides no numerical revenue or earnings guidance. Management expected to need additional capital, from the ATM or other sources, to fund operations, the arbitration liability, capital expenditures, and scheduled debt payments through September 30, 2015. Liquidity depends on revenue growth, expense control, access to financing, and compliance with debt covenants. Management said it believed the company was in compliance with its loan covenants; the required U.S. minimum cash threshold was $9.8 million at September 30. A continuing default could allow the lender to accelerate repayment and foreclose on collateral.
- Management reported ongoing cost reductions, facility consolidation, and a workforce of approximately 291. Further reductions in operating costs and capital spending could be made if needed.
- Customer concentration is notable: INOX Wind represented 48% of quarterly and six-month revenue. The company also depends on wind-market demand, government support and funding, customer adoption, suppliers, and successful execution of manufacturing and product-development plans.
- Sinovel litigation in China remains unresolved. The company seeks substantial damages for alleged unpaid shipments and intellectual-property infringement; Sinovel has asserted counterclaims. The company said it could not reasonably estimate possible losses or a loss range on the contract proceedings.
- Other risks include foreign-exchange exposure, performance-bond collateral restricting cash access, and uncertainty around sale proceeds from minority investments. The company recorded foreign-exchange gains of $0.9 million for the quarter and $1.0 million for six months.
Important facts for investors to verify
- Whether the company can raise additional capital and sustain liquidity while operating losses and cash outflows continue.
- The timing, enforceability, and ultimate cash cost of the Ghodawat award, including accruing interest.
- Whether revenue and gross margins recover, particularly given the sharp declines and INOX Wind’s 48% revenue share.
- Debt-covenant compliance, scheduled repayments, and remaining unrestricted cash relative to the required threshold.
- Developments in Sinovel proceedings and the prospects for recovering receivables or obtaining damages.
- Whether Tres Amigas can be sold on commercially reasonable terms; Blade Dynamics has been fully impaired.